Balance Sheets: The Good, the Bad and the In-Between

Rather than pick one of those four balance sheets, I will discuss many of the problems that plague all or some of these companies, including:

• Negative or deficit retained earnings
• Negative equity
• Negative net tangible assets
• Low current ratio

Negative or deficit retained earnings: Retained earnings represent the cumulative net income of a company. When a company has a negative retained earnings balance, it says to the world that it has generated accounting losses over a prolonged period of time. Here are the retained earnings, in millions, for Six Flags, Level 3, Sirius and XM -- taken directly from the most recently available quarterly (first quarter of 2007) balance sheets:

• Six Flags: -$1,560.20
• Level 3: -$9,586.00
• Sirius: -$3,978.47
• XM: -$3,620.91

(Source: TheStreet.com Quotes Section)

Negative equity: When the deficit in retained earnings surpasses the amount of capital that the company has, this is a red flag that signals that the company is in distress.

When a company is in distress, it has two options. Option one is to recapitalize its balance sheet by issuing additional capital (selling common or preferred stock). If that's not possible, then the other option is to file for bankruptcy.

Two of the companies I pointed out earlier -- satellite radio twins Sirius and XM -- have negative equity. Those companies chose to merge. Whether or not that merger occurs, I think that in the long run, one of them, both or a combined company may see its destiny in Federal Bankruptcy Court.